By Stefano Rebaudo
(Reuters) -The dollar fell on Monday but remained within striking distance of its highest level in almost two weeks, as investor focus shifted to a U.S. jobs report due late this week.
US payrolls, due on Friday, will be crucial after Federal Reserve Chairman Jerome Powell turned the fight against inflation to a willingness to guard against job losses.
Analysts say the jobs numbers will determine the size of the Federal Reserve’s expected rate cut. Markets have been pricing in a 25 basis point cut for weeks.
The dollar had earlier moved to its strongest since August 20, supported by a rise in long-term Treasury yields to their highest level since mid-August, as inflation data pointed to a smaller rate cut.
US gross domestic product figures also showed that the economy was sufficiently strong to give the Federal Reserve room to be less aggressive in easing policy.
Traders currently see a 33% chance of a 50 basis point Fed rate cut this month, while a quarter-point cut is fully priced in. A week earlier, expectations for the larger reduction were still 36%.
“These days it’s all about economics,” says Athanasios Vamvakidis, global head of forex strategy at BofA.
“We expect the dollar to weaken in the second half of this year, but the market should not get too excited about that,” he added, marking a target for the euro at $1.12.
“The US economy is slowing, but still faring much better than the rest of the world.”
The benchmark against six major peers weakened 0.08% to 101.67 after reaching 101.79, a level not seen since August 20.
The price fell last week for the first time since July 2023 to a low of 100.51, after Fed Chairman Powell gave a strong signal that the easing campaign would begin at the upcoming policy meeting.
The euro strengthened 0.2% to $1.1060 after reaching $1.1043, its lowest level since August 19.
On the political front in Europe, Alternative for Germany (AfD) was on course to become the first far-right party to win a regional election in Germany since World War II, forecasts showed, giving the party unprecedented power even as others parties will certainly know that. exclude it from office.
“The only clear lessons are that the far-right AfD continues to resist the temptation of power until they gain an outright majority,” said Christian Schulz, deputy chief economist for Europe at Citi.
Some investors worried that a political deadlock in Berlin and Paris could prevent Europe from pursuing integration initiatives that could boost growth and allow Europe to play a bigger role in global affairs.
Money markets lowered their bets on European Central Bank rate cuts as services inflation remained persistent in August and ECB policymakers gave no indication of additional monetary easing following a widely expected rate cut in September.
They have priced in 59 basis points of rate cuts by year-end – implying two 25 basis point steps and a 36% chance of a third cut – from 67 basis points immediately after the German inflation data release last week and from 70 basis points mid year. -August.
NON-FARM WAGE ROLES
A U.S. holiday on Monday made for a slow start to the week for the dollar, analysts said, but the next few days will see a steady stream of macroeconomic data culminating in nonfarm payrolls data on Friday.
Economists polled by Reuters expect 165,000 U.S. jobs to be added in August, up from an increase of 114,000 the previous month.
Analysts said the numbers around consensus forecasts were consistent with a soft landing and the Fed eased policy by 25 basis points this month.
“With numbers at or below 100,000, we see the risk of a hard landing and market prices increasing the likelihood of a 50 basis point rate cut,” BofA’s Vamvakidis said.
The dollar rose 0.40% to 146.74 yen.
Analysts argued that it would be difficult to see the dollar rising against the yen at a time when the Fed is poised to cut rates.
Government bonds will not trade on Monday due to the US holiday, but the 10-year yield was at 3.9110% after rising 4.4 bps on Friday.
